The issue of the division of deferred compensation in divorce – more particularly, unvested deferred compensation, is often one that is hotly disputed. This is in part because there is not a lot of case law on the issue. The case law is clear that deferred compensation (eg. stock options, restricted stock, RSUs, REUs, etc.) granted during the marriage, or even shortly after the date of complaint but for efforts that occurred during the marriage are subject to equitable distribution. The fights arose regarding whether (1) the deferred compensation should be treated as either income and/or an asset; and (2) if an asset, should they be divided 50-50 or in some other percentage. In fact, I blogged about this in a piece entitled Deferred Compensation – Income, Asset or Both, back in 2013. at the time, I said:

If the deferred compensation is not vested and requires continued, post-divorce Complaint service in order for vesting to occur, that is where things get more difficult. I have seen some simplistically argued that anything granted before the Complaint gets equally divided no matter when it vests. More recently, I have seen a greater use of some type of calculation (coverture fraction) used to recognize the post-complaint service of that spouse. Many believe this to be the fairer way of equitably dividing deferred compensation.

There hasn’t been much case law on this issue since that time, though a case that I will discuss later, suggests that the language of the documents granting the deferred compensation is key, That said, late in 2018, we got some more guidance from the Appellate Division. Specifically, in the reported (precedential) opinion in the case of M.G. v. S.M. decided on December 26, 2018, Judge Mawla gave new guidance with regard to the distribution of deferred compensation, again pointing to the importance of the plan documents.

In M.G., the plaintiff worked as a principal consultant for a large multi-national corporation. Beginning in August 2003, and every August thereafter until 2010, plaintiff received a stock award from his employer. Plaintiff received 490 shares in 2003 and those years began to vest at a rate of 174 shares per year commencing in 2011. A similar vesting schedule was applied to the other grants. Note that in my experience, this is an unusual vesting schedule. That is, it is unusual, in my experience, for their to be a 7 year gap before deferred compensation vests. Typically, I have seen deferred compensation serially vest, over three or five years, starting with the year following the grant. What that means is that if 600 shares of restricted stock were granted in 2018, then they would vest 200 shares each in 2019, 2020 and 2021. Other times, you see shares cliff vest in 3 or 5 years. What that means is that if 600 shares were granted in 2018 that vest in 3 years, all 600 shares would vest in 2021. This is important because the argument you most often heard from the titled spouse is that the because the shares will vest post divorce allegedly based upon post divorce efforts, that they should be distributed in a less than 50-50 percentage.

Back to M.G. At the date of complaint, only 3 of 8 awards were fully vested. At trial, plaintiff offered into evidence plan documents that stated:

Stock-based compensation is a key component of our reward program . . . because it provides an ownership stake in the company’s success for employees who contribute over the long term. To preserve this core element of our culture, in July 2003, [we] decided to grant employees stock awards, which represent the future right to receive shares of . . . stock when a vesting requirement is satisfied.

. . . .

At [our company] we believe that employees who become shareholders maintain a long-term, vested interest in sustained individual excellence and the overall success of the company.

. . . .

Each eligible employee’s annual stock award grant is based on his or her impact, level, and country.

In my experience, the plan language for most plans is much more generic than this. However, in this case, the plan language supported the husband’s position that his continued employment was required for him to receive the value of the options. Judge Mawla noted:

Plaintiff’s unrefuted testimony was clear that post-complaint efforts were necessary to cause the stock, which had not vested as of the date of complaint, to become payable. The plan documents and literature adduced in evidence at trial, and attached to plaintiff’s post-judgment motion, stated vesting would occur dependent upon plaintiff’s post-complaint performance. We reject defendant’s argument that “performance” in this case required plaintiff merely to continue living and go to work. Nothing in the record supports this assertion. Indeed, all of the objective evidence in the record demonstrates much more was required of plaintiff as a high-level corporate employee in a highly competitive industry.

As we noted, plaintiff’s employer described the stock plan as a “reward program . . . because it provides an ownership stake in the company’s success for employees who contribute over the long term.” Company literature explained the stock grants were to “maintain a long-term, vested interest in sustained individual excellence and the overall success of the company.” This language does not suggest the stock would vest through mere continued employment without consideration of plaintiff’s level of proficiency. Nor does this language suggest the stock awards were for work already performed.

As a result, Judge Mawla held that the trial judge misapplied his discretion because in the absence of any evidence or testimony to the contrary, he concluded the stock was earned for work performed during the marriage. Judge Mawla rejected both the use of a coverture fraction or applying the concept of “marital momentum” to address the equitable distribution of the unvested stock awards noting, “In instances where an asset has been granted after the date of complaint, these principles are of little help because they presume a marital component attributable to the asset in question.” (emphasis added).

In determining how to divide such assets, Judge Mawla modified a mechanism found in a case out of Massachusetts. Specifically, the court adopted the following rubric:

(1) Where a stock award has been made during the marriage and vests prior to the date of complaint it is subject to equitable distribution;

(2) Where an award is made during the marriage for work performed during the marriage, but becomes vested after the date of complaint, it too is subject to equitable distribution; and

(3) Where the award is made during the marriage, but vests following the date of complaint, there is a rebuttable presumption the award is subject to equitable distribution unless there is a material dispute of fact regarding whether the stock, either in whole or in part, is for future performance. The party seeking to exclude such assets from equitable distribution on such grounds bears the burden to prove the stock award was made for services performed outside of the marriage. That party must adduce objective evidence to prove the employer intended the stock to vest for future services and not as a form of deferred compensation attributable to the award date. Such objective evidence should include, but is not limited to, the following: testimony from the employed spouse; testimony of the employer’s representative; the stock plan; any employer correspondence to the employed spouse regarding the award; and the employed spouse’s stock plan statements from commencement of the award and nearest the date of complaint, along with the vesting schedule.

In this case, the court noted that the unvested stock was either in whole or in part unattributed to the marriage based upon the plan documents and testimony at trial.

But before people go too wild about this decision, and simply say that all non-vested deferred compensation is the property of the titled spouse, they should really go back to square one and look at the grant documents, because many, if not most, are not like those in M.G. In fact, in an reported case last year entitled K.C. v. D.C., a review of the plan documents lead to an entirely different result.

Rejecting the husband’s argument about his post-complaint efforts being necessary to receive the deferred compensation, the court held that the RSUs awarded were “subject to equitable distribution and shall be equally divided,” observing defendant provided no evidence to support his theory that the award was for future performance. Like in M.G., the generic purpose of the plan was:

to aid the Company . . . in recruiting, retaining and rewarding key employees . . . of outstanding ability and to motivate such employees . . . to exert their best efforts . . . by providing incentives through the granting of Awards. The Company expects that it will benefit from the added interest which such key employees . . . will have in the welfare of the Company as a result of their proprietary interest in the Company.

Different from M.G., however, is the fact that the employee would still get the deferred compensation if they died, became disabled, or were terminated through no fault of their own. Put another way, no post-complaint efforts were specifically required. Accordingly, the Court held:

Aside from the generalized aspiration that “key employees” who are granted RSUs will have an enhanced interest in the welfare of Accenture, there is no requirement that the employee meet any performance goals before a batch of RSUs will vest pursuant to the schedule. The only condition for vesting is “continued employment.” Moreover, in the event the employee is no longer employed due to death or disability, all of the RSUs granted, whether vested or not, are transferred to the employee or his estate. Obviously, the transfer of RSUs following death or disability would not be based on future performance.

In sum, all the documentary evidence in the record1 states that such promotional grants are awarded based on performance ratings at the time of the award, in recognition of employees’ efforts, and no document provided to the court states defendant must meet any given performance goal to trigger the vesting of RSUs that are part of the grant. Contrary to defendant’s argument, the record was clear, and fully supported the trial court’s determination that the RSUs were subject to equitable distribution.

So what is the takeaway here. You need more than just a party’s self serving testimony. You need the plan documents and the documents seemingly must really require post-divorce exemplary efforts more than just staying employed, in order to exempt the deferred compensation granted but not vested during the marriage. M.G. does not address the necessary corollary which would be that if the deferred compensation is exempted from equitable distribution, should it not then be considered as income available to pay alimony when it vests? Seems so but we shall see.

Eric Solotoff is the editor of the New Jersey Family Legal Blog and the Co-Chair of the Family Law Practice Group of Fox Rothschild LLP. Certified by the Supreme Court of New Jersey as a Matrimonial Lawyer and a Fellow of the American Academy of Matrimonial Attorneys, Eric is resident in Fox Rothschild’s Morristown, New Jersey office though he practices throughout New Jersey. You can reach Eric at (973) 994-7501, or esolotoff@foxrothschild.com.

Very often, we deal with cases where our client or his/her has compensation from employment that is more than just salary plus bonus. Rather, with all of the financial services companies, pharmaceutical companies and other corporations in this area, we see all sorts of different compensation structures, including stock options, restricted stock, RSUs, REUs, etc. Moreover, when the employee is in management or higher up in the company, the types of deferred compensation and/or equity plans can get even more complex. Further, by its very nature, deferred compensation is not realized as income immediately, but usually over several years, typically 3 to 5 years. Often it vests in two ways. On way is serial vesting – 100 options are granted which vest over 5 years – 20 per year. Sometime there is cliff vesting which means that the options all vest in year 5. When an employee has been with a company for several years, then often start to have deferred compensation vesting each year and possibly available for income.

The question often arises as to whether these deferred compensation vehicles are income, assets or both, While the answer is not simple, it is not as complex as many make it out to be..

Typically, deferred compensation that was granted prior to the date of the Complaint for Divorce is treated as an asset and is subject to equitable distribution. If the deferred compensation is vested, meaning it can be immediately cashed in, then quite often it is equally divided (though again, New Jersey is an equitable distribution state not an equal division stated so it is not an automatic that these assets will be equally divided – sometimes it just seems that way.)

If the deferred compensation is not vested and requires continued, post-divorce Complaint service in order for vesting to occur, that is where things get more difficult. I have seen some simplistically argued that anything granted before the Complaint gets equally divided no matter when it vests. More recently, I have seen a greater use of some type of calculation (coverture fraction) used to recognize the post-complaint service of that spouse. Many believe this to be the fairer way of equitably dividing deferred compensation.

In his post, Mark ruminates on the difficulty in deciphering the modern pay stub. Mark notes that over the years we have evolved from a time and place where compensation consisted of salary and a bonus to one where a paystub reads like the Dresden Codex (an anthology of Mayan astronomical tables). In fact, the piece emanated from him having just devoted more than half an hour to reading and interpreting two paystubs that included salary, commission, vacation time, etc. as well as more than $100,000 of payments under the titles: ECC Disc Incentive; Long Term Cash Vest; RS Unit Vesting; and RSS Vesting.

Of course, once a you get past the alphabet soup of categories of income and withholdings, next you have to figure out what to do with them. For instance, you have to make a decision as to whether this is really income, an asset or both. This often comes into play with regard to bonuses and the exercise of deferred compensation. Is it recurring or non-recurring? Is it an anomalous, one time payment? Does this reflect an undisclosed change in how and/or the amount of someones compensation. What year should it be attached to, e.g. a bonus paid in 2012 for 2011 (do you just look at income received in the calendar year or do you add the salary received in a calendar year to the bonus for that year paid in the first quarter of the next year?)

I recently heard a person say that their spouse believed his alimony and child support would be based solely on his salary. I am sure he would like that but that statement is wishful thinking at best. If he was correct, several hundred thousand dollars each year would be his alone and not considered for support. Aside from potentially being unfair, it is not the law.

In fact, in New Jersey, the definition of income from support purposes includes all sources of income. In fact, the Child Support Guidelines includes, but is not limited to 23 possibilities for income, as follows:

For any family law practitioner, a high net worth and asset-rich divorce matter can become complicated. Depending on which party the attorney represents, careful thought must be given to the division of assets, tax consequences and the calculation of income for support purposes. This task has become more difficult with the recent volatility of the stock market and the many changes in high earning executive compensation, retirement and bonus packages. A recent article in BusinessWeek by Alexis Leondis addresses and reminds us of many of these changes.

As many big financial firms gained media attention as a result of their financial practices and federal bailouts hit the streets, these companies were forced to take a closer look at their executive compensation packages. Historically, many of the higher up executives received what some would call enormous bonuses in addition to their already six figure salaries. These bonuses were included when calculating support figures as this money was typically used to meet daily expenses of the family, including the maintenance of lifestyles that consisted of private school tuitions, nannies and luxury vacations.

Mark Ashton, a partner in our Exton, Pennsylvania office, and the editor of the firm’s Pennsylvania Family Law blog, wrote an excellent post on that blog entitled "Stock Option Developments." To read the post, click here.

Stock options have become a large part of executive compensation over the last few decades. Moreover, they have become common additional/incentive compensation even for non executives who work for large public companies. We have had to deal with the issue of options both in terms of the division of them in equitable distribution and as a component of income for determining alimony and child support.

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